A new year and a new acquisition

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A new year and a new acquisition for a major player in the outsourcing market as Wipro is set to buy Citigroup’s Indian IT subsidiary for $127 million.

Last year I commented on TCS acquiring another Citigroup captive and highlighted the importance of such deals. It appears that 2009 may be the year for a bustling captive market.

With the recession far from over costly captives will be the first aspect of any major financial corporation to be sold off. Banks, in order to reduce costs, will see the sale of captives as an appealing money saving option. The initial cash raised from the sale, twinned with a reduced price when buying back the services, will certainly come in use during difficult times.

Citigroup is not the only one to be considering cost saving options. Fidelity Investments’ technology arm is also under the eager eyes of Infosys, TCS and Wipro and I suspect the offers will be too good to refuse.

2009 is set to get harder for financial services. Falling currencies and shares means that institutions will have to look internally to free up much needed capital. Selling off captives is a relatively painless way of making cash fast.

However banks will need to be aware that the supply and demand curve will also apply to the selling of captives. Many financial institutions will be spurred on by these big money deals and as soon as the market becomes saturated, the money offered will fall considerably.

Some organisations may find themselves being forced to undersell a captive and then having to buy back the service at a high price, a situation which they will want to avoid.

Service providers will also need to step up their game when bidding for these captives. Prior experience may well be a deciding factor when banks consider who to buy back services from. Credentials and evidence of experience will all be carefully scrutinized to ensure that the banks do not end up in a poor strategic partnership which they can’t get out of.

Service providers will need to shine and the healthy competition surrounding the purchasing of captives might lead vendors to display innovative solutions and added value, something which the whole industry would benefit from.